The 1% Rule in Real Estate: Does It Still Work?
The 1% rule says monthly rent should be 1% of price. See what it actually predicts at a 7% mortgage, where it misleads, and check any listing with the calculator.
By Real-Estate Analyzer Team · Updated
The 1% rule says a rental is worth a closer look if its monthly rent is at least 1% of the purchase price. A $200,000 house should rent for $2,000 a month. Its companion, the 50% rule, says operating expenses will eat about half the rent.
Both are useful for filtering listings in seconds. Both were also popularized when mortgages cost 3–4%. This guide shows what the rules actually predict at today's rates, where they mislead, and gives you a calculator to check any listing.
1% Rule Calculator
Enter the price and rent to see the rent-to-price ratio, then add your financing and expenses to see whether the deal actually cash flows. The defaults are the sample deal from our guides.
Expenses = taxes, insurance, maintenance, management, vacancy (not the mortgage). Assumes a 30-year loan and 3% closing costs.
This deal keeps $187.46 a month. The analyzer tests what happens if the numbers don't hold.
Stress-test this dealThe 1%, 2%, and 50% Rules
- 1% rule: a quick screen for buy-and-hold rentals. If you include upfront repair costs in the price, the test is more honest.
- 2% rule: an older, stricter screen. Today it mostly turns up low-priced properties in weak areas, where the high rent ratio is payment for high risk.
- 50% rule: a shortcut for estimating NOI when you don't have real expense data yet. Half the rent goes to taxes, insurance, repairs, CapEx, management, and vacancy, and the other half is left to pay the mortgage.
What the 1% Rule Actually Predicts at a 7% Mortgage
Take a $240,000 property with 25% down and a 7%, 30-year loan ($1,198/month). Here is the monthly cash flow at different rent-to-price ratios, using two expense assumptions:
| Ratio | Rent | CF (40% expenses) | CF (50% expenses) |
|---|---|---|---|
| 0.6% | $1,440 | −$334 | −$478 |
| 0.8% | $1,920 | −$46 | −$238 |
| 1.0% | $2,400 | $243 | $3 |
| 1.2% | $2,880 | $531 | $243 |
At 7% interest and 50% expenses, a property that exactly meets the 1% rule only breaks even. The rule used to signal solid cash flow. Today it marks roughly the line between losing money and making a little. At 40% expenses, typical for newer single-family homes where tenants pay utilities, break-even falls to about 0.83%.
Our sample deal rents at 0.96%, fails the 1% rule, and still cash flows $187 a month, because its real expenses run 40% of rent, not 50%. The rule would have thrown away a workable deal, which is exactly why you should run real numbers on anything close.
Your Own Break-Even Ratio: A Formula for Any Rate
You can work out the rule for today's market instead of using a number from a different interest-rate era. The rent-to-price ratio at which a deal breaks even is:
The loan constant is annual mortgage payments divided by the loan amount (see the loan constant explained). For a 75% LTV, 30-year loan and 50% expenses:
| Mortgage rate | Loan constant | Break-even rent/price |
|---|---|---|
| 3% | 5.06% | 0.63% |
| 6% | 7.19% | 0.90% |
| 7% | 7.98% | 1.00% |
| 8% | 8.81% | 1.10% |
This explains the history. When mortgages cost 3%, a 0.63% property broke even, so the 1% rule was generous: a 1% deal had a wide margin. At 8%, the same rule sits just 0.1 points above break-even. The rule didn't change; the cost of money did. Aim for a ratio comfortably above your own break-even figure, not above 1%.
Where the 1% Rule Misleads
- Cheap properties pass easily. A $70,000 house renting for $900 is a 1.3% property. Older buildings, higher turnover, and costly repairs on a low rent can eat that margin and more.
- Property taxes and insurance vary hugely. Two 1% properties, one in a state with 2%+ property tax and high insurance and one with 0.6%, can differ by hundreds of dollars a month in cash flow.
- Expensive markets never pass. In many coastal cities, ratios of 0.4–0.6% are normal. The 1% rule says “never buy”. Investors there are betting on appreciation, a different strategy that needs IRR, not a rent ratio.
- It ignores financing. The same ratio cash flows nicely at 5% and loses money at 8%. See how mortgage terms change returns.
How to Use the Rules Properly
Use them as a filter at the top of your funnel, never as a decision:
- Screen listings at a ratio that fits your market and today's rates. For example, 0.8%+ for newer homes or 1%+ for older ones.
- Run anything that passes through real numbers: actual tax bill, insurance quote, vacancy, CapEx, and management.
- Check cash-on-cash return, DSCR, and a stress test before making an offer.
Key Takeaways
- 1The 1% rule: monthly rent ≥ 1% of price. The 50% rule: expenses ≈ half the rent, before the mortgage.
- 2At a 7% mortgage and 50% expenses, a property that exactly meets the 1% rule only breaks even.
- 3Properties with lower real expense ratios can cash flow below 1%, so don't discard near-misses without running numbers.
- 4Cheap 1%+ properties often hide high repair and turnover costs.
- 5Use the rules to filter listings, then decide with cash-on-cash return, DSCR, and a stress test.
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A small team of investors. Every worked example in our guides is calculated with the same engine the analyzer runs. How we check our numbers. Educational content, not tax, legal, or investment advice.